IT'S a tale of two cities. As Shanghai and Hong Kong vie to use yuan liberalization to bolster their market status, it's the best of times of those supporting a freer yuan but perhaps the worst of times for those impatient to see a free-floating currency.

It's been five years since China inaugurated a yuan-reform program aimed at strengthening its standing as a rising economic power by slowly transforming the yuan into an international currency. At the same time, authorities have been anxious to avoid currency market speculation, hot money flows and chaos for exporters, keeping the currency firmly under government control.

Beating back pressure from the US and the European Union for a rapid appreciation in the yuan, China's cautious approach toward liberalization of its not-free-flowing currency is now at the stage of expanding investment options in the yuan.

Shanghai is playing a key role in pilot programs set up to move that process forward. The city's institutions were among the first to be allowed to engage in yuan settlement for cross-border trade, issue yuan-denominated bonds for incorporated overseas banks and authorize the establishment of yuan-exchange companies.

What was launched in Shanghai is slowly expanding across the country.

In late June, China expanded the trial program for yuan settlement for cross-border trade to 20 provinces and municipalities. It had been previously restricted to Shanghai and four southern Guangdong Province cities.

More programs are in the pipeline.

Shanghai is pushing forward a mechanism to allow overseas companies that open cross-border trade settlement accounts at banks in Shanghai to invest in the domestic equity, bond and interbank credit markets.

"Such companies already have access to the yuan through trade settlements," said Fang Xinghai, director at the Shanghai Financial Services Office. "All we need to do now is to set up a mechanism to let them have more investment options beyond just waiting for the currency to appreciate."

China's capital account is now limited to overseas companies. Its current account, the one for trade, is open.

Meanwhile, Shanghai is also preparing to launch an international board at the Shanghai Stock Exchange to allow qualified foreign companies to issue yuan-denominated stock in China.

"The China securities regulator has prioritized the international board on this year's work agenda," said Wang Jianjun, deputy director of the office of the China Securities Regulatory Commission.

What's more, the securities regulator is also planning to allow companies listed on the board to convert the capital they raise for overseas investment.

Hong Kong, too, is playing a role.

State Council rules, issued in April 2009, to build Shanghai into a global financial hub by 2020 caused some angst in Hong Kong, as financial institutions there worried their premier role as the financial gateway to Chinese mainland might be usurped.

The Chinese government moved to ease those fears by measures including instituting closer cooperation in yuan trading between the mainland and the special administrative region.

On July 19, the People's Bank of China and the Hong Kong Monetary Authority signed a supplementary memorandum of cooperation on yuan business in Hong Kong, lifting all restrictions on Hong Kong banks offering yuan accounts and providing related services to financial institutions.

The yuan business in Hong Kong has been rising since February 2004, when China first allowed banks there to offer yuan deposits, remittances and currency conversions for Hong Kong residents.

"There's large room for a further development of the renminbi business in Hong Kong, despite the inconvertibility of the yuan," said Liao Qun, chief economist at CITIC Bank International. "Hong Kong is set to become a fully fledged offshore yuan market by 2020."

Xie Duo, director of the financial market department of the People's Bank of China, said China is encouraging the use of Hong Kong as an offshore market for the Chinese currency, with more companies allowed to issue yuan bonds in the city.

The central government has introduced several important initiatives in the past years to promote the development of the yuan business in Hong Kong.

In 2009, China allowed mainland subsidiaries of Hong Kong banks to issue yuan-denominated bonds.

HSBC China, Bank of East Asia China and other lenders have already issued bonds in Hong Kong for Chinese mainland development.

Last year, the Ministry of Finance issued 6 billion yuan (US$885 million) of sovereign bonds in Hong Kong, the first such issue in an offshore market.

The appreciation of the yuan since July 2005 is also adding to the yuan's popularity overseas.

"We can expect to develop a market in Hong Kong in which the yuan can be traded more actively, albeit in a restricted way, and hence the overall yuan business will be able to accelerate under the current conversion regime," Liao said.

Hong Kong Monetary Authority data showed that there are about 80 billion yuan of yuan deposits in Hong Kong, while economists said they expect the figure to grow to 200 billion yuan by the end of this year.

How China loosened brakes on currency

Today earmarks the fifth anniversary of China's foreign exchange reform. Several breakthroughs have been made in the past five years. The following is a recap of the major events tracking the yuan's liberalization:

July 21, 2005

China dropped the yuan's decade-long peg to the US dollar, shifting to a basket of currencies of major trading partners, including the euro and the Japanese yen. The yuan appreciated 2.1 percent.

September 23, 2005

The People's Bank of China doubled the floating band of the yuan against non-US dollar currencies to 3 percent.

January 3, 2006

The central bank introduced the over-the-counter exchange mechanism.

May 15, 2006

The yuan broke the historic level of 8 against the US dollar.

February 1, 2007

Individuals in China were allowed to increase their yearly foreign-exchange quota to 50,000 yuan from 20,000 yuan.

May 18, 2007

The central bank increased the yuan's trading band against the greenback to 0.5 percent from 0.3 percent.

August 2007

The State Administration of Foreign Exchange canceled the quota on current-account for accounts.

September 2007

China set up its sovereign wealth fund, China Investment Corp, to expand investment channels for China's mounting forex reserves.

April 10, 2008

The yuan broke the historic level of 7 against the US dollar.

July 6, 2009

China started a trial program to settle cross-border trades in yuan in Shanghai and four southern Guangdong Province cities.

June 19, 2010

China pledged to increase the flexibility of China's exchange-rate regime and further improve the exchange rate mechanism but ruled out a one-off appreciation.

The stance is deemed to be a key signal of change in the forex regime, away from its de facto fixed peg to the dollar. The yuan then resumed its appreciation against the US dollar.

June 22, 2010

China expanded its trial program on yuan-backed cross-border trade settlement to 20 provinces and municipalities from five cities.

July 19, 2010

The Hong Kong Monetary Authority and People's Bank of China signed a supplementary memorandum of yuan cooperation to scrap restrictions on banks in Hong Kong offering yuan services for financial institutions.